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EURUSD OUTLOOK WEEK OF JUNE 9, 2013: 4 Things To Consider

For EURUSD traders or investors using related ETFs such as UUP, UDN, FXE, etc.

EURUSD Outlook: Short term neutral/bullish, longer term bearish

The main long term EURUSD driver

Reasons behind recent EURUSD rally

Technical Picture

Coming week likely EURUSD drivers and what makes them influential

Longer term the USD outlook remains bullish as long as the Fed continues to appear hawkish relative to the ECB, BoJ, BoE, RBA, and other leading central banks. Belief that the Fed was indeed the only one moving towards a meaningful tightening has been the fuel of the USD rally. Other considerations were short term or minor.

Over the past week, that longer term USD rally has been undermined by a variety of factors, including:

Overcrowded USD Long Trade: Those expectations of Fed hawkishness created an overcrowded USD long position that was vulnerable to any disappointments. We got a few of those over the past weeks. The USD weakened vs. the JPY and EUR due to:

A correction in the Nikkei rally: Much of that was a Jeff Gundlach style trade of buying Japanese stocks while shorting the JPY by being long the USDJPY. Volatility in recent weeks prompted by the new QE tapering speculation reversed the Nikkei rally and the USDJPY longs.

However the biggest two EURUSD drivers of the past week were

ECB Closes “Hawkishness Gap” With Fed: The ECB didn’t signal any inclination to ease in the near future.

Meanwhile the US jobs reports showed the US economy too weak for the Fed to make any significant QE tapering.

In sum, the chances of reducing USD dilutive QE have dropped, and so have the chances for EUR dilutive new ECB stimulus.

Technical Picture

In the near term, the EURUSD rally faces strong resistance at the 1.331 area from its 61.8% fib retracement of its decline that began in early 2013, which capped its advance last week. The 38.2% fib retracement markets 1.31 zone remains the likely near term support area, and the 23.6% fib retracement around 1.29690 is the deeper support zone if the pair completely retraces last week’s gains.

Given the light economic calendar, the short term bullish EURUSD momentum and end of week bounce in risk appetite that we saw on the S&P 500 both lend technical support to further moves higher to test the above noted resistance this week.

Key EURUSD Events This Week

As we noted in our review of last week’s lessons for the coming week, the biggest market driver is sentiment on Fed QE tapering. Given the weak fundamentals in the US, EU, and global economy, markets are depending on continued QE, and any change in that assumption is a game changer, as recent volatility across regions and asset classes shows.

In other words, the big question for the USD (and the EUR too given how the two influence each other) for the coming week is clear: what is the timing and extent of QE tapering, if any?

Therefore the market moving power of any given event or news item is based on how much the event influences perceptions about the answer to that question.

US economic event risk is light, however Thursday and Friday may some event-driven moves if the Advance Retail Sales, weekly first time jobless claims, Univ. of Michigan Consumer Confidence, and PPI data provide any surprises. The retail sales data is the most compelling data for the Fed as it weighs QE tapering, and hence is the most important data point.

The EUR calendar is even lighter, but has what to watch.

The big event is Tuesday’s German constitutional court ruling on whether Germany can participate (i.e. fund) the ECB’s Outright Monetary Transactions policy (OMT), as the ECB’s promise to buy struggling states’ debt infringes the German constitution’s insistence on sovereign parliamentary control over budget matters. Thus far German courts have avoided obstructing EU programs. It may well seek to defer a decision until after German elections. If the court forbids German participation, expect an end to the EURUSD rally and a pullback in the EUR from the resulting uncertainty as to how the OMT could function without the EU primary paymaster. However last week The Telegraph’s Abrose Evans-Pritchard came out with a report suggesting a ban on German participation was a real possibility. See here for details. If that should happen, we could well face a new round of EU crisis anxiety hitting markets, as the OMT program’s credibility would suffer without Germany there to write the biggest share of the check.

Thursday’s 10 year Italian bond auction could be market moving if it shows a rate spike and weak demand, as the GIIPS bond auctions and rates remain a useful barometer of credit risk and thus EU crisis anxiety. This could become a particularly interesting test if the German constitutional court rules against German participation in OMT.

Longer term, as long as the EU continues to contract and the US maintains its slow but steady recovery, then that difference in the performance of these two economies should continue to fuel a longer term EURUSD downtrend.

Longer term, as long as the EU continues to contract and the US maintains its slow but steady recovery, then that difference in the performance of these two economies should continue to fuel a longer term EURUSD downtrend.

Reminder

Most central banks are leaning toward further easing.

It’s doubtful that the Fed is going to tighten in any meaningful fashion in 2013.

That means those with most of their assets denominated in or linked to the EUR, USD, JPY, RBA, GBP and other currencies at risk of debasement need to diversify their currency exposure to hedge that currency risk. See here for an award winning guide on safer, simpler ways to achieve that goal, for both beginners and experienced traders and investors.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.